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On the Empirical (Ir)relevance of the Zero Lower Bound Constraint

Davide Debortoli, Jordi Galí, Luca Gambetti


This chapter is a preliminary draft unless otherwise noted. It may not have been subjected to the formal review process of the NBER. This page will be updated as the chapter is revised.

Chapter in forthcoming NBER book NBER Macroeconomics Annual 2019, volume 34, Martin S. Eichenbaum, Erik Hurst, and Jonathan A. Parker, editors
Conference held April 11-12, 2019
Forthcoming from University of Chicago Press
in NBER Book Series NBER Macroeconomics Annual

We evaluate the hypothesis that the zero lower bound (ZLB) constraint was, in practice, irrelevant during the recent ZLB episode experienced by the U.S. economy (2009Q1–2015Q4). We focus on two dimensions of economic performance that were ex-ante likely to have been affected by a binding ZLB: (i) the volatility of macro variables and (ii) the economy's response to shocks. Using a variety of empirical methods, we find little evidence against the irrelevance hypothesis, with our estimates suggesting that the responses of output, inflation and the long-term interest rate were hardly affected by the binding ZLB constraint. We show how a shadow interest rate rule (which we take as a proxy for forward guidance) can reconcile our empirical findings with the predictions of a simple New Keynesian model with a ZLB constraint.

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This chapter first appeared as NBER working paper w25820, On the Empirical (Ir)Relevance of the Zero Lower Bound Constraint, Davide Debortoli, Jordi Galí, Luca Gambetti
Commentary on this chapter:
  Comment, Ben S. Bernanke
  Comment, Mark W. Watson
 
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